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Monday, 7 November 2016

Please don’t curb innovation by resisting change

Our businesses tend to be heavily regulated by the government. Often, the unintended (or as some would claim, intended) consequence is to create monopolies and use regulations to prevent newer players from entering the market.

And yet, ever so often, a business aided by technology comes along and completely upsets the status quo. This is a fast growing trend, with companies — using the internet, insights from data, and the increasing use of smartphones — connecting people at an unprecedented scale and tackling challenges faced by traditional businesses. Google is using its search engine power to solve medical challenges. Apple is considering building autonomous cars. The likes of Amazon and Flipkart already did it with e-commerce. And of course, the poster child of disruption — Uber — that’s changing the face of transportation globally.

However, as has been the experience of new technology from time immemorial (remember the labour unions protesting computers in the 1990s or the Luddites against the Industrial Revolution), they face massive roadblocks from entrenched interests.

The public transport industry is an especially interesting case. It’s a heavily regulated business, where the government regulates the number of vehicles, the qualifications of drivers, and the fare. As a result, the same car that costs you Rs 5 lakh as a personal vehicle can be as expensive as Rs 7–9 lakh if purchased for commercial purposes. Some cities require you to be a resident in the city for over 10 years to get a commercial driving permit. And then there are the fares, arbitrarily levied, which make public transport prohibitively expensive for the masses.

This is why the recent regulations framed in Maharashtra are a classic case of regulation being used to curb innovation. Instead of looking forward and recognising the inevitability and convenience of such app-based services, they look to bring them at par with the existing taxi industry.

Regulating apps like taxis

People often ask why Uber shouldn’t be regulated like other taxi services without realising that the many conditions required in such regulations no longer make sense. For example, the need to limit the number of taxis existed to ensure that drivers were guaranteed a steady rate of business. It was also justified by incumbents as a measure to reduce congestion. But conventional taxis pick up rides on the street and depend on physically driving by their next customer. However, apps allow us to ‘match’ with distant cars, automatically expanding the pool of opportunities for drivers.

Several countries have already moved away from such ludicrous restrictions based on specious and unscientific justifications. In fact, I’d say, why over-regulate the taxi industry? This may be the time to overhaul how we provide transport services and create more competition and private sector involvement. It’s not like our current systems have served us that much better. As the World Bank notes, the share of public transport in cities has declined from 69 percent to 38 percent between 1994 and 2007.

There is a significant grouse against Uber-aligned cabs not paying licence fees as high as other taxis, but why impose the sickness from one business into another? In fact, the government should do a cost-benefit analysis. I’d assume that the revenue generated through a one-time licensing fee would be far smaller than the service tax collection that can be supported through app-based transactions.

The Maharashtra rules also create arbitrary conditions like requiring 50 percent of the fleet above 1,400cc. There seems to be very little public welfare in this. How is a 1,400cc car better than a 1,000cc one for someone who is just concerned about getting from point A to B? And how does it matter to the regulator if I want to travel in a Wagon R instead of an SUV? In fact, heavier cars mean higher costs, and would limit the drivers’ ability to provide competitively priced services. Needless to mention, it would severely curtail the ability of many aspiring drivers to join platforms like Ola and Uber, leaving many existing drivers with no source of livelihood.

The surge problem

Then there’s the claim of mandatory fares and how, like MRPs, they look to protect consumers. In reality, these fares operate to guarantee revenues for taxis. Remember the days when a radio cab took Rs 500 to drop you home, the same trip that you can complete in less than half the amount now? Those cars had an MRP-like system. Competition has led to the market offering the same service at much lower rates. Conventional taxis have a limit on the number of rides they can complete in a day. Using the internet, an app-based car can complete double the number of rides and thus charge half the amount from customers.

But what about the terrible surge pricing? First, surge is an over-abused concern. In reality, surge pricing is levied only on a small part of the trips. Moreover, these technologies don’t own any assets but create two-sided markets: of customers and drivers. The role of the app then becomes to create the most efficient market. In order to meet every demand, it needs to first ask the existing drivers, and if the current pool of drivers is unable to meet the demand, get more drivers to join the system, which is why a temporary surge attracts more drivers.

Any business would by hook or by crook recover their costs. So even if the regulations cap the rates, the apps would raise the rates across the board, thereby impacting all customers. On the other hand, surge pricing allows apps to allocate the increased cost only to those customers who are willing to pay. This is the reason why, in a recent study by Stephen Levitt, author of Freakonomics, it was concluded that Uber created a consumer surplus of $6.8 billion per annum for its users in the US.

The way forward: a case for taking a step back

A big fear is that once these businesses expand, people will be at the mercy of these apps. Firstly, the Indian market is extremely price-sensitive. So if Uber starts charging more, I’m sure there’ll be the next upstart who will come into the market to provide services at a lower rate. Secondly, our regulatory system already provides for solutions for this problem. If any business uses its dominant position to abuse the market, the Competition Commission can step in and rectify the problem.

And finally, sometimes there is wisdom in not acting. Why not wait it out to see how the market develops and then step in to rectify any mistake? Meddling now may kill off a growing industry that has tangible benefits to consumers and to those many thousands of drivers at the bottom of the pyramid using these apps to make a decent living. It’s worked wonders for the TRAI, where it had an official policy for forbearance, or more simply put, of not meddling in tariff setting.

This resulted in creating one of the most competitive telecom markets in the world. However, with sufficient competition and a large user base, the TRAI is now thinking of becoming more proactive in relation to tariffs. Regulations should try and focus on innovation and look to create a safe environment for customers and drivers alike, instead of trying to restrict how to conduct business by using protectionist measures under the garb of creating a level playing field.

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